Pensions: Automatic saving to start at 18 under new plans

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Waiters are among the workers who have been enrolled in recent years

Every worker aged 18 or over will begin saving into a workplace pension unless they opt out, under government plans to extend its automatic enrolment scheme.

At present, the scheme means employers must enrol staff aged 22 and over and earning above £10,000 into a pension.

Ministers hope to reduce the minimum age to 18 in the mid 2020s and say it will affect about 900,000 young people.

The system has been credited with ensuring more prepare for older age but it brings extra costs for employers.

It has been introduced gradually since October 2012.

“For an entire generation of people, workplace pension saving is the new normal. My mission now is to make sure the next generation of younger workers have the same opportunities,” said Work and Pensions Secretary David Gauke.

What is automatic enrolment?

A slice of a worker’s pay packet is automatically diverted to a pension savings pot, which is invested until retirement. Their employer also makes a contribution, as does the government.

Individuals have the option to opt out if they wish to, although that will mean losing the employers’ contribution.

At present UK workers aged 22 and above are automatically enrolled, assuming they earn more than £10,000 a year and are not already signed up to a workplace pension.

Anyone on a short-term contract, working where an agency pays their wages, or who is on maternity, adoption or carer’s leave should still be eligible.

The total minimum contribution is currently set at 2% of earnings (0.8% from the worker, 1% from an employer, and 0.2% as tax relief from the government).

From April 2018, it will increase to 5% of earnings (2.4% from the worker, 2% from the employer, and 0.6% as tax relief). From April 2019 onwards, it will rise to 8% of earnings (4% from the individual, 3% from the employer, and 1% as tax relief).

Changes

In light of a review of the automatic enrolment system, the Department for Work and Pensions plans to extend the system to workers aged 18 and over who are earning £10,000 a year or more. Those earning less can ask their employer to enrol them.

Iona Bain, founder of the Young Money blog, said that the move was still inadequate in solving a long-term pension crisis for the young.

“A lot of young people still do not know what a pension is. There is a danger of people sleepwalking into pensions and not having control of it. In the past this has been a recipe for dashed expectations,” she said.

She said that school leavers, facing a “storm of financial pressures” should have the same National Living Wage as those aged 25 and over, if they were expected to contribute into a pension.

The move will require legislation, as will the proposed other changes to the system including:

Contributions calculated as a proportion of all earnings up to £45,000 (the threshold of the higher rate of tax) rather than the current system which calculates it as a proportion of earnings between £5,876 and £45,000. This will help those with multiple jobs

Annual reviews of the trigger point for automatic enrolment (at present, when a worker earns £10,000 or more). Contribution levels will also be reviewed

Exploring the use of technology to encourage the UK’s 4.8 million self-employed people to save for retirement

The proposals will cost employers an extra £1.4bn a year, and the government an extra £600m in tax relief a year.

“Requiring employers to contribute from the first pound of earnings, will mean that, by 2019, hundreds of thousands of small employers will have to pay up to £180 more per employee each year,” said Mike Cherry, national chairman at the Federation of Small Businesses.

“For employers in certain sectors, such as care and hospitality, where margins are tight this will really add up.”

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More than nine million people in the UK have been automatically enrolled into a pension so far, adding to the 10.8 million already contributing to a workplace pension.

However, the proportion of earnings being set aside is much lower now than before 2012.

The average proportion of earnings put into an investment-based defined contribution pension has fallen from about 9% of earnings before auto-enrolment to 4% now.

The DWP’s review, led by industry representatives, estimated that 12 million people are not saving enough for their retirement, representing 38% of the working age population.